13 Apr Overview of Multi-Family Commercial Real Estate
This report is one in a multi-part series covering multi-family real estate, a sub-sector of the commercial real estate investment banking market.
Multi-Family Commercial Real Estate property is one that is comprised of five or more units. Beyond this initial definition, specifics vary by location and the size of the structure. All real estate properties, Multi-Family included, are classified into three asset classes: class A, B, or C, depending on the overall quality of the property.
Class A properties are best-in-class and demand the highest rents in their respective markets. They offer things like lavish pools, barbeque areas, fitness centers, among other amenities. Class B are just a step down from Class A in terms of quality, location and features within the complex. They are still considered nice and aren’t necessarily outdated like properties one would find within Class C. Class C properties are generally completely outdated and barely functional, but are affordable to rent.
Within each of these classes there are Garden Style or Low, Mid, and High Rise apartment buildings. Low Rise and Garden Style are generally found in suburban areas and are generally 2-4 stories high. Mid Rise are between 5-9 stories, while High Rise apartments are 10 or more stories.
Corporate properties are divided into different industries the largest consisting of the following:
- Apartments/Multi-Family: Considered less volatile as leases generally are independent of economic cycles. Also, the fiscal risk increased by the loss of one tenant is able to be minimized by other leased units. Leases are generally held in 1-2 year terms.
- Office: Characterized by longer lease cycles and more volatility in economic cycles. Can be spaces with single or many tenants. Multiple tenants lends to less risk.
- Retail: includes small shops and large malls. Can be negatively impacted by consumer trends and economic cycles. Current outlook remains questionable due to online sales.
- Industrial: Leases are held for long periods often leading to potential underappreciated lease payments later in the lease periods. Industrial units typically involve one or a few units, so risk can
The two main factors that drive renting demand are population growth and cost of ownership. The ratio of owners to renters in the US generally holds at 1.7 to 1. In the US, renters comprise 37.1% of the population. As population grows and the ratio of owners to renters holds constant, the number of renters directly increases. The ratio is primarily influenced as the comparative cost of owning vs. renting changes. As the cost of renting or owning increases independent to its counterpart, the population of households lean towards the cheaper option.
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- The Benefits to Investing in a Multi-Family Commercial Property, INCO Commercial(2016), https://incocommercial.com/benefits-investing-multi-family-commercial-property/ (last visited Mar 1, 2018).
- Ian Formigle on, Making the Grade in Real Estate: Understanding Class A, B and CCrowdStreet(2017), https://www.crowdstreet.com/education/article/grade-real-estate-understanding-class-a-b-c/ (last visited Mar 1, 2018).